Over-investment, along with many reasons, means that the private sector is not willing to invest because their businesses are becoming unprofitable in China. On top of that, the private sector is highly leveraged, which means that central banks may lower interest rates, but in the absence of profitable businesses and high debt, the private sector will not invest. This is reflected in the fact that investment in manufacturing is now a major drag on total investment.
Dong Tao of Credit Suisse, one of the best China economists, came up with the following perfect metaphor describing the Chinese economy (emphasis ours):
Imagine the scene when a car is stuck in the snow. The driver keeps stepping on the gas pedal. The wheels move, but the car does not move forward. This car is called the Chinese economy. The Beijing leadership is in the driver’s seat, stepping on the gas pedal. Between the wheel and the snow is the liquidity trap. Thus, under excessively loose monetary conditions, further easing in monetary policy does not get the Chinese economy moving forward.
He also noted that this could well be the first time in the country’s history that monetary easing does not boost investment:
We believe the core problem that led to the current slump was the sudden disappearance of investment interest from the private sector. This is the first time in the 63 years’ history of the People’s Republic that monetary easing has failed to jump-start private investments. The manufacturing sector, where private capital has been active and where China has built its status as a global manufacturing centre, has become broadly unprofitable amidst surging wages, massive over-capacity, and currency appreciation. Banks have had a challenging time attracting quality borrowers who are still interested in investing in real business. We do not believe this situation can be adequately addressed by merely lowering funding costs in the economy.
And the following rather familiar chart shows that with loans dominated by short-term loans and bills, interests in long-term investment is still lacking.
